By: Moshe Coronel  | 

Shaky Links: How the Russia-Ukraine War is Impacting the Global Economy

On Feb. 24, 2022, Russian President Vladimir Putin shocked the world by announcing the start of a “special military operation” to “demilitarize” Ukraine. Since that announcement, Ukrainian President Volodymyr Zelensky and his Western allies have produced an astonishingly successful defense of Ukraine, taking back more than half of the land captured since the beginning of the war. While the war by itself is a significant global event, it has also had a much more extensive impact on the global economy by creating shortages of critical supplies and disrupting supply chains.

Arguably the biggest impact of the war has been the decrease in global supplies and commodities. Ukraine and Russia are part of what’s known as the “global breadbasket,” which supplies almost 30% of the world’s grain and 75% of the world’s sunflower oil. Many African and Asian countries, including Tunisia and Indonesia, rely heavily on grain imports from these countries to feed their populations, and the war has hit these countries hard. Another big area impacted is the energy market. Part of the Western response to Russian aggression was the enactment of financial sanctions and the stopping of trading with Russia, which has hurt Russia’s ability to fund its war. However, this process has affected many European countries in turn as Russian gas accounts for 10% of the global supply and many European countries, especially Germany and Lithuania, rely heavily on Russian gas to keep the lights on. Finally, Russia controls a significant market share in the export of metals such as aluminum and nickel which are critical for the function and manufacture of everyday appliances and transportation like planes, cars and batteries. As with the food and energy sectors, metal prices are exhibiting record highs, with the greatest being the nickel market, which has hit its 10-year high mark. The bottom line is that the global economy has been slammed by this war and is slowly trying to respond to those changes.

These macroeconomic changes have, in turn, big implications for citizens all around the world. According to some estimates, European energy costs have more than doubled due to this trade imbalance. These shortages are sharply increasing global inflation and hurting consumers worldwide; the European Central Bank has recorded the highest inflation since it started producing those statistics, at more than quadruple the targeted 2%. The global inflation rate as a whole has increased as much as 3% specifically due to the Russo-Ukrainian War, which translates into billions of dollars coming out of the consumer's pocket. All of this depressed global output and consumer spending is contributing to the International Monetary Fund’s outlook: “Global growth is forecast to slow from 6.0 percent in 2021 to 3.2 percent in 2022 and 2.7 percent in 2023.” Organizations like the Dallas Federal Reserve are saying that “War-related energy and food price hikes have some parallels with previous crises, such as the oil shocks of the 1970s.” All this doom and gloom has led to one of the sharpest drops in European consumer confidence ever recorded. There is a general feeling of hardship that has taken over the worldwide marketplace, and this will be alleviated with time. 

In response to all these pressures, Western countries are reshaping their supply chains and relationship with the global market. EU countries are closely coordinating actions to tackle rising prices and scarcity of supplies. The EU has agreed to phase out dependence on Russian fossil fuels as soon as possible and has banned almost 90% of all Russian oil imports by the end of 2022. The EU has also agreed on new measures to secure and share gas supply in the EU, as well as to limit the volatility of gas and electricity prices. The US government is also taking a hard line on Russian aggression and its effects, with the US leading talks to enforce a price cap on the sale of supplies from Russia, balancing global supply needs and preventing Russia from profiting from the war. The US has announced that the sanctions, which have been imposed in response to Russia's actions in Ukraine and interference in U.S. elections, have led to a decline in Russia's GDP, a decrease in foreign investment and a depreciation of the ruble. Governments are responding, and in time the effects will moderate.

The ongoing Russo-Ukrainian War has had far-reaching consequences on the global economy. The disruptions in supply chains and shortages of critical goods have resulted in increased inflation and decreased economic growth. These changes have had a significant impact on the livelihoods of citizens worldwide, particularly in developing countries, where the majority of citizens live below the poverty line and are already struggling to make ends meet. The trade imbalance and energy shortages caused by the war have added to the already dire economic situation in these countries. Additionally, the war has also led to a decline in consumer spending, as people are forced to spend more on essential goods and services. Yet in spite of the hardships, there is a light at the end of the economic tunnel, and only time will tell on the effectiveness of the response to Russian aggression and its economic consequences. 

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Photo Caption: Russian and Ukrainian flags as puzzle pieces

Photo Credit: Pixabay